Paretianism And The Fundamental Theorem Of Welfare Economics

Have I told you before I love reading? Through my reading I have been exposed to many different ideas. I looked at the list of books that Paul Sohn wants to read, mentioned in his blog, and I was challenged and encouraged by his breadth of interest. Those who grew up in the 60’s had many different sayings, one of which involved mind expansion. There were those that believed drugs were the tool of expansion. I think we were incorrect in that assumption. However, reading is the one thing that can truly expand our minds.

I have recently been exposed to two congruent ideas proposed by Alfredo Pareto (1848-1923).  We usually think of Pareto when we use bar charts displaying data used to make business decisions. But Pareto’s ideas were much greater and deeper than aligning data. Two of which I’d like to discuss this morning: Pareto Optimality and the fundamental theorem of welfare economics.

As I have stated before Adam Smith has aligned free enterprise with political freedom. However, “Smith’s defense of markets did not rest on their purported allocative efficiency, but rather on their connection to social relations based on freedom and equality.” In other words, free enterprise based on direction from the invisible hand, leads to product distribution efficiency, but not an egalitarian income distribution. The innovative, creative drivers who are willing to take greater risks earn greater rewards.

The role then of government is to assure the free expression of choice within the market. As Amartya Sen argues, “Rather than evaluating a market solely in terms of its ability to satisfy a person’s subjective preferences, [one must evaluate the market’s] effects on a person’s actual capabilities, the person’s ability to do and achieve.” In a free system, people should be nourished, literate, and have the “ability to appear in public without shame.” This is rich with meaning.

Free enterprise means we have the ability to chose what we wish to sell and buy. A free political system means we have a choice to choose our political leaders without fear of retribution. There are certain unalienable rights that we as free citizens have that are endowed on us by our creator, thus government is put in place by our God, to ensure these human rights are protected.

The tension between strong centralized government and a free market that we are currently experiencing has been masked by economic advancement. This tension is usually experienced any time we go into a recession. However, it is only when the recession is prolonged, like a depression, that we feel we need to deal with the dissonance.  FDR felt so strongly about this he created a second bill of rights, while several wealthy families were so strongly opposed to redistribution that they attempted to hire a general to overthrough the government of the United States. Cities that have made huge financial promises to its employees are finding they cannot meet their obligations. The Federal government has spent to a level that we will need to pay the piper. These are the moments when we argue over money, and the purpose of government.

The fundamental theorems of welfare economics reflect what we are arguing about. The first theorem argues that free markets move to points of price equilibrium leading to an efficient allocation of resources. This is called Pareto Efficiency. It is not an egalitarian distribution of wealth, but the market distributing goods according to demand. The second theorem is very interesting. “The second theorem states that out of all possible Pareto-efficient outcomes, one can achieve any particular one by enacting a lump-sum wealth distribution and then letting the market take over.” This could argue for a government intervention to redistribute wealth and then let the market do its work. This sounds like to Biblical “year of jubilee,” when the economy was reset.

I am convinced there is nothing new under the sun. We just continue to reinvent the wheel. I’ll tell you, this is why I like to read.

And that is my thought for the day!

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Adam Smith And Classical Liberalism

Yesterday I met with several individuals to plan our Chapel event for next week. The title of our event is “Economics, Business, and Social Justice: doing well, while doing good.” We laid out our program, listened to the students who will be a part of the panel discussion, and we believe we are ready to go. However, something has stuck with me as a result of this meeting that I have been pondering it.

When I started teaching at Warner Pacific, I focused on Management of people. I did that for several years, and enjoyed it, and I think I did ok at it. However, somewhere along the line I stopped being just a practitioner who teaches, to an academic who thinks and then teaches. As I told my academic dean the other day, I want to evolve as a Professor and academic, but not lose the practitioner elements. Today’s blog will be an academic reflection of why my teaching focus has taken a more philosophical edge.

Almost two years ago I taught a class, URB/EC 420: Microeconomic Development. We have changed the title to Microenterprise Development, which reflects more closely what the class is. This 7:30am class was an early morning exploration into “Social Change initiated through collaboration.” We identified the collaborators as the government, business, and community.  I had five business students and five social science students. They would sit across the table from each other and discuss how society could be improved through partnership. It was one of those classes that changed how I look at things.

I have also come to the conclusion that proponents of free enterprise have allowed market philosophy to be pushed into a civic definition that is not accurate. The fallen nature of human kind, being what it is, ensures that we will mess things up, but this can be redeemed. To support this premise, I want to review Adam Smith’s view of the market. I specifically want to thank Debra Statz, from Stanford, for her help in this idea.

Statz, in her book “Why Some Things Should Not Be For Sale,” argues that Adam Smith, viewed as the Father of Capitalism believed, “that, in the context of market relations, independent individuals would not only produce increased wealth but would also make a liberal social order.” To understand the significance of this statement we have to define what is meant by “liberal social order.”

Smith’s “Inquiry into the Nature and Causes of the Wealth of Nations,” was written in 1776, last revised in 1784.  He wrote this book in the context of emerging commerce, which was allowing the serf to escape bondage. Feudalism was eroding, while order and good government were leading to more freedom. “Smith argued that markets liberate individuals from their abject dependence on one powerful person [the lord] by allowing them to sustain themselves through exchanges with thousands of anonymous and indifferent customers.” Through the process of voluntary exchange, buyers and sellers had a choice, recognizing the commonality of status and freedom. They can choose to do what they want, when they want, and how they want.

Statz develops this further when she states, “Yet Smith recognized that the ability of laborers to escape from servility to a master through markets is dependent upon a number of conditions, including how competitive the labor market actually is and the skill levels of laborers,” but the fact is, due to free enterprise, and not a Feudal system of master and slave, we have a choice.

I am convinced that not only does free enterprise support innovation of products and processes, thus leading to a higher standard of living, but it supports a liberal society in the classical understand of liberty. Freedom!

Smith also recognized the validity of government’s relationship with free commerce. Smith was aware of the fallen nature of humankind. He also understood the role of government within God’s economy. God has established government to ensure society is safe. Therefore, Smith “was extremely aware of the tendency of the merchants to attempt to bring the state in as an ally in controlling their workers a tendency that he argues must be resisted.” Thus we could argue that government has a role when any type of asymmetric event occurs. For voluntary exchange to truly be free; and not create a tragedy of the commons; the commons must be properly maintained by government!

The free market allows us to raise our status, we are no longer frozen in a Serfdom enslaved to a lord, with initiative and hard work we can improve our lot in life. The congruency of free enterprise and political freedom, in my way of thinking, can never be separated. That is unless, we want to go down the regressive road of Serfdom.

And that is my thought for the day!

Impact Measurement!

Yesterday was a good day! I left the house around 8:30 to go to the club. I played Pickleball for an hour, showered and went to WPC. I met with students, prepared for the Faculty meeting I facilitate, met with Steve and Ben not-for-profit consultants, and met with the President of the school. I returned home at 6pm. What made this a good day was the Faculty approving a project I have been working on with several people at the school. Social Entrepreneurship is a new major WPC will be offering next year; and, the lessons I learned from Steve and Ben about not-for-profit organizations.

WPC will be offering a Masters in Management and Organizational Leadership – with a focus on not-for-profits. Ben, David, and Steve are practitioners in the community who are going consult with WPC as we first tweak and then revise the MMOL to better train not-for-profit leaders in the community. David and Steve, and even Ben, are dynamic individuals who I have/will learn much about community activism. There are five critical elements that our program will need to address: fundraising, board development, volunteer management, marketing, and impact measurement. I woke up this morning thinking about these elements.

As I was pondering and opened my WSJ, low and behold what should I see, but an article written by Bill Gates on impact measurement. The title of his article is, “My Plan To Fix The World’s Biggest Problems* Measure Them.” Gates stated, “In the past year, I have been struck by how important measurement is to improving the human condition. You can achieve incredible progress if you set a clear goal and find a measure that will drive progress toward that goal.” Seems rather for-profit to me.

Not-for-profits are known for inefficiencies and continuing programs that don’t work. However, after talking with Steve, it seems that is changing. Whether it is donor driven, or the need to get more output with less input, the fact is, not-for-profit organizations are recognizing the need to be operationally effective and efficient.

Gates recognizes that social innovation will not have an impact unless it gets to the people that need it. He states, “An innovation – whether it’s a new vaccine or an improved seed – can’t have an impact unless it reaches the people who will benefit from it. We need innovations in measurement to find new, effective ways to deliver those tools and services to the clinics, family farms, and classrooms that need them.” Instead of piling up food on a dock someplace, or having the elite take most of the charitable aid, organizations are concerned with meeting the real need.

The huge chasm between for-profit and not-for-profit is shrinking. I think this is a good thing. Economic scarcity is a reality. There is only so much food and medicine, and there is so much need. For-profits have been dealing with efficient operations since the beginning or time, and it appears not-for-profits are getting serious about this too.

Social Businesses, not-for-profits, Social Entrepreneurs, Corporate Social Responsibility and Triple Bottom-Line thinking all testify to me the changing world of commerce. Maybe we are beginning to see that improving the human condition does not involve Pareto Optimality, but Pareto Improvement. This is not a zero-sum economic game, but a process of freedom to choose how we work, save, and care about others. I think we are now beginning to recognize that profit is not the only motivator for commerce. Everyone needs a higher purpose for action, in appears we are getting it.

And that is my thought for the day!

 

What We Need IS More Conscious Capitalism!

Deirdre McCloskey in her wonderful book “Bourgeois Dignity: Why Economics Cannot Explain The Modern World,” makes a wonderful point, “As the political scientist John Muellar put it, capitalism – or as I like to call it, innovation – is like Ralph’s Grocery in Garrison Keillor’s self-effacing little Minnesota town of Lake Wobegon: pretty good. Something’s that pretty good, after all is pretty good. Not perfect, not a utopia, but probably worth keeping in view of the worse alternatives so easily fallen into.” This and our conversation yesterday has inspired today’s blog.

I love our conversations around the lunchroom table. We talk about many different topics. I am usually the token conservative, which I am ok with. But, I love the conversation because it gets me thinking. The conversation recently has been around the inaugural address by President Obama. Much has been written about his new resolve, and his focus on promoting large government ideas. On the other hand you have John Boehner who is making statements about President Obama’s attempt to destroy the Republican Party. In both cases, I am concerned with the rhetoric, and its continuing polarization of our political leaders. But there may be a light shining in the wilderness. Paul Ryan is a voice crying in the wilderness for a Jack Kemp process within the Republicans. Momma said life was never going to be easy.

I think all of the players need to pay attention to the four tenets of Conscious Capitalism. According to John Mackey the four tenets are: higher purpose, stakeholder integration, conscious leadership and conscious culture and management. Conscious Capitalism, or innovation as McCloskey defines it, chooses a win-win higher-purpose. “Business,” Mackey states, “has a much broader positive impact on the world when it is based on a higher purpose that goes beyond only generating profits and creating shareholder value.” Conscious Capitalism recognizes the importance of creating value, because as they create value, profits will follow. This type of business model recognizes that “each stakeholder is important,” and it “must seek to optimize value creation for all of them.”

Some would argue that all this is doing is putting lipstick on the lips of a pig. Capitalism is the cause of all the world’s ills. However, McCloskey would argue otherwise. She notes that Paul Collier, an Economist stated, “since 1980 world poverty has been falling for the first time in history.” As an absolute number, poverty has actually been falling for two centuries. McCloskey recognizes this change, but she states, “An economics of a bourgeois or Marxist sort does not account for the unprecedented size and egalitarian spread of the benefits from growth, only the details of its pattern.” Poignantly she identifies that “talk and ethics and ideas caused the innovation. Ethical (and unethical) talk runs the world.” I think she is correct, innovation (Capitalism), created through creative dialog, helped to advance living standards of people around the world. To support this idea, all we need to do is look at Japan after WWII, and currently China and India.

Too long we have allowed innovative and dialog to be replaced with zero-sum negotiations. Stakeholder integration and conscious leadership embraces dialog and creative collaboration. “Conscious leaders are motivated primarily by service to the firms higher purpose and creating value for all stakeholders. They reject a zero-sum, trade-off-oriented view of business and look for creative, synergistic Win-Win approaches that deliver multiple kinds of value simultaneously.” Now that is what I am talking about.

Maybe our political leaders need to become Conscious Capitalists, instead of zero-sum antagonizers.

And that is my thought for the day!

 

Who Are Your Heroes?

As usual I have several books that I am reading. The Sustainable Company, Conscious Capitalism, and Keynes and Hayak are the three that I am focused on right now. However, I just purchased Bourgeois Dignity: Why Economics Can’t Explain the Modern World.” The author was on NPR the other night on Philosophy Talk, which was a fascinating discussion about Capitalism. I am totally enriched by this reading as I frame it through my understanding of Scripture.

My research continues to motivate me in my recognition of correct processes within business. Business involves profit, but only as we create value. This means that we as business people are focused on long-term value creation both economically and socially. We accomplish this by being environmentally friendly: the triple bottom-line. I am sold on this. However, what I really want to talk about this morning includes a question I want to ask myself and all of you: who are your heroes?

Warren Kozak wrote an article this morning in the paper entitled, “Lance Armstrong and Our Unheroic Age.” He starts the article by asking us, “Who were your heroes growing up?” I thought back when I was a child and came up with Sandy Koufax, Don Drysdale, and Arnold Palmer. Sunday on the Golf Channel there was story about Jack Nicklaus. He was first a family man then a golfer. It was an inspiring story, but I was more of an Arnold Palmer fan.

But now who are my heroes? Tiger Woods? Lance Armstrong? Both deeply flawed men. How about the list of individuals who were supposed to be voted into the Baseball Hall of Fame? Not one of them were voted in. Steroid scandals may keep both Barry Bonds and Roger Clemens out of the Hall of Fame.

But are there any heroes anymore? Is there anyone that is uncomplicated? Charles Barkley once said he was not a role model for children, but the fact is, he was a role model. Many young people look up to Kobe Bryant, Dwight Howard, Jason Kidd, and others who have made mistakes but climbed out of them.

My heroes of today are very different that of my youth. My heroes are people who are in books and lived long ago. Abraham Lincoln was not perfect, but I can romanticize him in a manner that reduces his flaws. Martin Luther King Jr., was another man who I look up to, but he was not perfect either. Therefore, how I view hero worship is not about perfection, it is about perseverance. In my older years I look for those who have been able to hang in there despite wrong choices and tough times.

Kozak identifies two examples from literature that I think are excellent frameworks for understanding heroes. Horatio Alger wrote a book in 1867 entitled “Ragged Dick.” “It was the story of a poor shoeshine boy who, through hard work, honesty, and perseverance, pulled himself up to respectability and a middle-class life.” The protagonist of this book would be a great hero for us to have today.

The second example is from the book “Pilgrim’s Progress” by John Bunyan. This was a book written from a dream Bunyan had while in prison for being a non-conformist preacher. It is an allegory describing Christian’s travels through life. Kozak describes this book as a,” quest of a boy who travels through sin, despair, and most of the evils known to man. Thanks to good fortune and guidance, he makes it to salvation on the other side.”  Christian was trying to live a good live, and through faith in God and hard work he made it. This to me is heroic.

Today we have trouble seeing heroic behavior. Kevin Bacon is starring in a new TV program called “The Following.” It is about a serial killer who is developing a following, and has escaped from prison. Bacon was the agent that previously helped catch the killer and put him in prison. The plot was interesting, but we turned it off due to the graphic violence. My point is that Bacon played a flawed character who was in a violent circumstance, who was going to be the hero. I am sure he will pull himself out of his flaws, but we just could not handle the graphic portrayal of violence.

I am having a hard time with not becoming this old fogey who is looking back at my youth as the good old days. I know they weren’t the good old days because much of what we see today, was happening back then, just not observed because it was hidden. The fact is though our leaders and heroes seemed to have different standards than today. And as we learned from Lance Armstrong many of the heroes of today that get caught doing something they shouldn’t apologize not because they are sad they did something wrong, just that they got caught. Those are not the heroic values of Ragged Dick and Christian. So maybe the good old days were the good old days? The degeneration of our age really concerns me.

And that is my thought for the day!

 

Deny Yourself – A New Way To Think About Business

“If anyone wishes to come after me, he must deny himself, and take up his cross and follow me.” Matthew 16:24

Today is MLK day, which means many of us will be performing some kind of a service event in honor of Martin Luther King Jr. Over 150 students, staff, and faculty from the school I teach at are going out into the community to do service activities. I think this is pretty neat. But it has got me thinking about what leadership is, and what successful living is. As I wrote two days ago, President Obama has a responsibility to serve all Americans; he has an opportunity to either push us farther apart or bring us together. If what I read this morning in the paper is true, he may be going in the opposite direction of where I think he needs to go.

What really got me thinking about denying yourself and service, was yesterday when I was listening to the car radio while driving to my club to work out. Charles Swindall, one of my favorite Bible teachers, was discussing this very topic. He mentioned that as a grand father he needed to be teaching his grand children how important it is to deny themselves and serve. His argument proposed that our culture is in trouble because of our self-indulgence and sensual gluttony.  Instead of service, we take. I really think this is true.

One area of our society that we see this is in the area of business. Entrepreneurs are individuals who see a process, and recognize they can do it better. This is not a greedy expression of someone who wants to get hugely rich, it is the expression of someone who wants to achieve and serve a customer. This process becomes tainted when profit maximization becomes the goal instead of customer service. John Mackey in his book, “Conscious Capitalism,” poignantly discusses this phenomenon.

Chapter one of this wonderful book discusses how capitalism is marvelous, misunderstood and maligned. He catches our attention with the words, “no human creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism. . . In a mere two hundred years, business and capitalism have transformed the face of the planet and the complexion of daily life for the vast majority of people.” Recently it has been reported that poverty throughout the world has been reduced by 50%. Obviously we here in the United States have seen our level of poverty increase, but India and China, due to the processes of free-enterprise (relatively speaking) have created higher standards of living for their people.

Deirdre McCloskey, an economist at the University of Illinois, has written a book entitled “Bourgeoisie Dignity.” She proposes that, “free-enterprise capitalism’s success have been entrepreneurship and innovation, combined with freedom and dignity for businesspeople.” She notes that automobiles, telephones, gasoline, etc happened because of innovation and entrepreneurs. Mackey argues that this simple philosophy of innovation and service has been hijacked, reframed as corporatism and greed, and made to be something it isn’t. I tend to agree with him.

According to Mackey, there are four reasons for this attack:

  1. Business people have allowed the ethical basis of free-enterprise capitalism to be hijacked intellectually by economists and critics who have foisted on it a narrow, self-serving, ad inaccurate identity devoid of its ethical justification.
  2. Too many businesses have operated with a low level of consciousness about their true purpose and overall impact on the world. Their tendency to think in terms of trade-offs has led to many unintended, harmful consequences for people, society, and the planet, resulting in an understandable backlash.
  3. In recent years, the myth that business is and must be about maximization of profits has taken root in academia as well as among business leaders. This has robbed most businesses of the ability to engage and connect with people at their deepest levels.
  4. Regulations and the size and scope of government have greatly expanded, creating the conditions for the spread of crony capitalism, restricting competition in favor of politically well-connected businesses.

I believe in the principle of service. I believe that the best leaders are servant leaders. I believe the best business strategy is a stakeholder strategy. As much as I’d like to end this discussion with some witty saying created by me, I would rather give you a poignant comment that will stimulate your thinking about free-enterprise and service.

Mackey states, “But with few exceptions, entrepreneurs who start successful businesses don’t do so to maximize profits. Of course, they want to make money, but that is not what drives them. They are inspired to do something that they believe needs doing. The heroic story of free-enterprise capitalism is one of entrepreneurs using their dreams and passion as fuel to create extraordinary value for customers, team members, suppliers, society, and investors.”

All of us want to have a meaningful life, but making millions will not necessarily get us there. It is through service this will happen.  This can be expressed in many different ways, even in business.

And that is my thought for the day!

What Should Obama Do?

My uncle sent me an email with several signs that are found in various locations. Several of the signs were humorous, but one stood out, especially in light of what I want to discuss today. The sign stated:

If pro is the opposite of con, then what
is the opposite of progress?
Congress!

I do think that is funny. Therefore, as I write this blog, and focus on what Obama needs to do during his second term, I recognize that our problems are multifaceted and have not been created unilaterally.

President Obama’s inauguration will be on Monday. He will be the seventeenth President to serve two terms. Grover Cleveland had two terms, but they were not consecutive. FDR was elected four times, but died in his forth term. Abraham Lincoln and William McKinley were both assassinated during their second terms. The track records of some of these second term presidents demonstrate how difficult a second term can be. Richard Nixon resigned due to Watergate.  Clinton was impeached over Monica Lewinsky. Ronald Reagan had his Iran-Contra affair. George W. Bush had two wars and a financial crisis. Second terms are tough.

Obama’s second term appears that it will be just like his first, antagonistic and partisan. I hope he learns from Clinton, whose personal failures were redeemed by his economic victories.

On NPR yesterday two political cartoonists were discussing what type of cartoons they were going to draw for the inauguration. The discussion covered why political cartoonists have gone easy on Obama over the years, and what they thought would happen from this point on. It was a very interesting and funny show. Obama currently has a 56% approval-rating going into Monday. But, as Juan Williams stated this morning in the Wall Street Journal, “economic uncertainty, threats to world peace, and extreme partisanship – will challenge his administration.”

So what does Obama have to do to ensure a positive legacy? Organizationally Obama is the leader of the United States. He himself has stated that “he is not the black president, but the president of all Americans.” But as Williams argues in his article the scrutiny Obama is receiving can be daunting. Williams point is shown by his statement, “As President, Mr. Obama, is dealing with scrutiny of his performance on the Level of Robinson, Marshall, and Mr. Powell – a scrutiny that is magnified by political passion.” In this statement Williams is arguing that the level scrutiny applied to situations where black men broke color barriers, is intense. Jackie Robinson in baseball, Thurgood Marshall in the Supreme Court, and Colin Powell as chairman of the Joint Chiefs of Staff. Right, wrong, or indifferent, Williams argues, the spotlight under which Obama finds himself is a bit more intense because he is the first president of color. This means the importance of his legacy cannot be understated.

Therefore, where does he need to focus? First, he needs to focus on his attitude. As Peggy Noonan stated, Obama is not hiding his disdain for Republicans. It does not make any difference if they deserve it; he is the president of all Americans, therefore lead like it then. President Obama’s highest priority is to get us to work together. It is time for Obama to stop the pity party, and get down to leading. He wanted the big chair, then use it appropriately.

Secondly, Obama needs to balance the books. Admiral Mike Mullen stated in 2010 that, “America’s debt was the greatest strategic threat the country faces.” Since 2010, $3 trillion of additional debt has been added, and we want to add more. I love how the Economist describes this, “pushing the dolorous pile above $16 trillion.” Dolorous, means gloomy, miserable, wretched. The Economist magazine, which supported Obama’s reelection stated, “Having ignored the recommendations of the deficit he himself established, Mr. Obama has never given any sign, other than rhetorically, of being at all serious about cutting entitlements.” They report noted that instead of cutting these entitlements, he has added additional cost with Obamacare.

Lastly, he needs to reaffirm how we, the United States, are positioned within the world. Russia has stopped Americans from adopting Russian children, and there is a list of Americans who are not allowed in Russia. I believe several politicians are on that list. I think the list has something to do with Guantanamo. We continue to try and tell Europe what to do, but they look at us and tell us to get our own house in order. China is another smoldering time bomb. And lastly, the Arab world is exploding.

Obama has a lot of work to do. With these major issues there is not time to be a lame duck president. Obama is a smart man, but he may have some personality traits that might get in the way of what needs to happen. I pray that he will get it, but my fear is he won’t. He wanted the big chair, he needs to step up to the challenge and lead all Americans, not just the Democrats.

And that is my thought for the day!